| | How Much Does a Renovation Cost, Anyway?
Q: I keep hearing other members of my real estate association talking about fixing up a whole house from top to bottom for $10,000 to $20,000. When I get bids for properties I’m thinking of buying, I find that I can’t get the same work done for less than $30,000. What am I doing wrong? A.L., Cincinnati
A: I’m guessing that you have several problems here. The first is a problem of perception. When you hear someone say that he fixed a house “from top to bottom” for $10,000, you might assume that he replaced everything—roof, furnace, walls, kitchen, bath, wiring, plumbing, etc. But this is probably not the case.
The goal of most investors who buy properties to renovate and resell is to buy cheap, spend $10-$15,000 on renovations and holding costs, sell for retail price, and pocket $25,000. Because major mechanical work (like rewiring, replacing plumbing, or overhauling the heating system) and structural work (like fixing foundations, leveling floors, or dealing with extensive termite damage)is expensive and time consuming, many investors won’t even consider tackling a property that needs these things. On the other hand, cosmetic work like kitchen and bath updates, paint, siding, carpet, landscaping, and decorating are relatively straightforward and inexpensive.
That’s why you need more information to determine how your colleagues are getting better prices than you are. The first question you should ask is, “Exactly what did you do to the property?”. If “fixed top to bottom” means updating cosmetics, a $10,000-$20,000 price tag is completely reasonable. If it means dealing with the mechanics and the structure, a $20,000 price tag is–well, let’s just say it’s highly suspect.
A second question you need to ask when someone quotes a seemingly low price for rehab is, “Who actually did the work?” If the investor did the labor himself, he’s quoting you a price for materials only, and paid only 25% or so of the cost of having the same work done by someone else. But on the other hand, he also spent an enormous amount of his own time (and endured enormous headaches!) getting the property ready for market–time that he’s probably not “paying” himself for when he figures out how much the rehab cost.
Here’s another question for you to ask colleagues: “Who acted as the general contractor?” The GC is the person who hires and supervises the people who actually do the work. When you hire a GC, he gets an override on the wages you pay the electrician, the drywaller, the carpet guy, and so on. This makes the whole operation cost about 10%-20% more than if you hire the workers yourself–and most investors do exactly that.
Which brings us to another thing you should know in understanding why your experienced investor friends can get work less expensively than you can: most experienced renovators have a list of contractors with whom they’ve been dealing for years. They have a track record with the contractors, so the contractors know that1) the jobs they perform for your colleagues will be relatively straightforward, with no last-minute changes 2) payment will be on time and in full 3) there are more jobs where this one came from. This level of trust–and the fact that the jobs the contractor does for the investor are relatively hassle free–means that the contractor is willing and able to charge a bare-bones price for his labor.
Finally, I wonder how you’re going about “getting bids” for your own fix-up. In my experience, it’s a huge mistake to tell a contractor, “Here’s what I want. Send me a bid”. You’d be surprised at how many contractors don’t have the first clue how to bid a job, and won’t even show up for your appointment. Some will make a sky-high bid because they really don’t need the job, or because they’re not good at estimating the amount of time it takes them to complete a job, and want be absolutely sure that they’re being paid appropriately. Still others will make a very low bid, either because they’re not good at estimating the time it takes them to complete a job, or because they’re desperate for work. And while this might seem like the best-case scenario for you, it usually ends with a contractor who feels cheated by what he’s being paid, and either wants to renegotiate halfway through the job or simply disappears one day, never to be heard from again.
The best, most efficient, and cheapest way of getting contractors to work for you is to decide exactly what work you want done and how much you want to pay for it. Don’t lowball; pick a price that compensates a skilled person fairly for the amount of time it ought to take him or her to complete the job. Put this in writing and show it to your potential contractor, and if he agrees, sign a CONTRACT outlining the terms of the deal. That’s why they call them contractors, you know.
So let’s summarize. Your fellow investors are paying less than you are because 1) they’re doing renovations that are less complicated and expensive; or are 2) doing all or part of the labor themselves; and are 3) bypassing the General Contractor and hiring the individual laborers directly. Plus, they’re 4) getting great prices from their contractors thanks to a history they have together and 5) bypassing the bidding process by figuring out what they want to pay and offering the job to the contractor at that price.
It seems to me that there are 4 steps to solving your problem. First, make sure you’re thoroughly educated about inspection, repair costs, and the renovation process. Second, take some of these fellow renovators out to lunch and pick their brains about how they control their rehab costs. Third, get referrals–exactly who do they use to do this work? And finally, start building your own network of contracts who perform well, trust you, and can be depended on to do the work you need at a price you can afford.
Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto regoddess.com